Chapter 7: The Market System PDF

Chapter 7: The Market System © 2017 Adam Smith's Wisdom, Inc.  Different Markets There are perhaps millions of markets in the overall market system There are two basic types of markets 1) Input markets 2) Product markets © 2017 Adam Smith's Wisdom...

Chapter 7: The Market System © 2017 Adam Smith's Wisdom, Inc.  Different Markets There are perhaps millions of markets in the overall market system There are two basic types of markets 1) Input markets 2) Product markets © 2017 Adam Smith's Wisdom, Inc.  Input vs. Product Markets In input markets (or resource markets), you and I and everyone else who owns useful resources (like our labor) sell these resources to businesses, who use them to make products In turn, business sell these products in the product markets to people who buy them https://www.youtube.com/watch?v=mN5H PJYJzus&t=18s © 2017 Adam Smith's Wisdom, (circular flow video: stop Inc. at 2:59) This is called “Circular Flow” © 2017 Adam Smith's Wisdom, Inc.  Importance of Money - exchange takes place in both markets (we sell our inputs and businesses sell their products) What do we both get in exchange? MONEY! © 2017 Adam Smith's Wisdom, Inc. Courtesy of Pixabay We need something to use to both buy and sell medium of exchange: something everyone accepts as payment -money plays several roles, but a medium of exchange is one of the most important! - you get paid at your job in money, and then use some of that money to buy products you need © 2017 Adam Smith's Wisdom, Inc.  Life before money barter: trading of equivalents (I trade my good or service for your good or service) - barter became complicated as markets grew - people needed something to agree on as payment (many chose gold for this purpose) © 2017 Adam Smith's Wisdom, Inc. Courtesy of Pixabay What made gold excellent as money? Gold is 1) portable: you can carry it with you 2) divisible: it can be broken into smaller parts to buy lots of something or just a little 3) fairly fixed in supply: it’s hard to come by in nature, so with a constant amount in circulation, prices will remain fairly fixed as well © 2017 Adam Smith's Wisdom, Inc.  Some other roles of money - it is a unit of account - it allows us to add up the value of stuff example: I bought $8.60 worth of stuff - you can add up the value of all you own or all you produce * money being a unit of account allows this to be done * gold did all of the above well © 2017 Adam Smith's Wisdom, Inc.  The final role of money that gold does well - it is a store of value - it makes good money because it looks the same as it did a thousand years ago - it doesn’t lose its value very much (bananas as money doesn’t work– they rot) © 2017 Adam Smith's Wisdom, Courtesy of Pixabay Inc.  Paper money replaced gold - the government prints paper money and mints metal coins (5 minute video) - on all paper money it reads “This note is legal tender for all debts, public and private” Meaning: the government says this is © 2017 money Courtesy of Pixabay Adam Smith's Wisdom, Images Inc. Circular flow with money added Remember the video? If not, go back and watch Market System and the role of ethics and government What constitutes a healthy market? 1) it is incredibly efficient 2) the outcomes will be fair as long as the starting line in the race for wealth is fair © 2017 Adam Smith's Wisdom, Inc. People don’t always play by the rules - a good government must be a good ref and regulate unfair advantages. However, too much policing of behavior slows down the economy, but too little leads to chaos © 2017 Adam Smith's Wisdom, Inc.  Role of government Government should do 2 things: 1) regulate destructive behaviors so that everyone takes full responsibility for the full cost of their behaviors when there are externalities 2) make sure the rules are fair and all are playing by the rules * but government can also be part of the problem because of its power. Government is a place that power seekers look to gain an advantage © 2017 Adam Smith's Wisdom, Inc. A good society doesn’t start with a good government - a good society starts with good citizens who participate to give us a good government “…of the people, by the people, for the people…” - what holds us together is the commitment to shared and just civic values (government doesn’t hold us together) - we pledge our allegiance to a nation that is indivisible, with liberty and justice for all” © 2017 Adam Smith's Wisdom, Inc.  Rights to freedom and fairness - we all have these and have a responsibility to ensure that fellow citizens enjoy that same right How does this work? 1) people must be committed to good government and to policing themselves 2) the rules must be fair to all 3) everyone must start the race for wealth from a similar starting line (same © 2017 Adam Smith's Wisdom, opportunities in Inc.  From the previous slide… * notice that “1” depends on “2” and 3” * If people are to be committed citizens, they have a right to expect fair rules, and to expect the game isn't rigged against them © 2017 Adam Smith's Wisdom, Inc. Some do act out of commitment and not for self-interest Consider the following stories: * Teacher in Jonesboro, Arkansas * Congressional Medal of Honor Winner * Martin Luther King speech- “leave a committed life behind” Acting out of commitment and not for self-interest is the real glue to a © 2017 Adam Smith's Wisdom, society! Inc. From a Micro to a Macro Perspective - Micro looks at the economy through a microscope and looks at 1) how individuals make choices 2) how markets coordinate those choices 3) what determines whether the market system is going to work constructively or destructively 4) what causes markets to fail © 2017 Adam Smith's Wisdom, Inc.  Things to remember… - when citizens work hard and play by the rules, markets efficiently and effectively coordinate the desires of suppliers and demanders - markets bring out the best energy and imagination of all © 2017 Adam Smith's Wisdom, Inc. We’ve been talking about parts - up to this point we have been talking about parts that make up the whole economy. Now we want to look at that system as a whole. This is called the macroeconomy. We call the study of this macroeconomics © 2017 Adam Smith's Wisdom, Inc.  Macroeconomic questions include: 1) How big is the whole economy? 2) How well is the whole economy doing? 3) How is our whole economy being affected by other countries’ economies? 4) What, if anything, should our government be doing to ensure that our whole economy is healthy and is being treated fairly in the global economy? © 2017 Adam Smith's Wisdom, Inc. Courtesy of Pixabay